The Raft of the Medusa and New Zealand monetary policy

I learned something from Graeme Wheeler’s speech this morning. Having not gotten round to reading Andrew Graham-Dixon’s Caravaggio, which has now lingered on our bookshelves for five years, it hadn’t occurred to me that the Gericault painting The Raft of the Medusa was influenced by Caravaggio; in Graham-Dixon’s words, it is a “modern secularised version of an altarpiece by Caravaggio”.

It is a striking painting, but this was a strange speech – and nowhere more so than in the concluding reference to The Raft of the Medusa.

There was plenty of routine material I agreed with. It gets boring to say it, but central bankers have to go on making the point that monetary policy has no material impact on longer-term real interest rates, longer-term average real exchange rates, or the longer-term real growth performance of the economy. For 25 years, real interest rates and the real exchange rate have averaged too high here, and real per capita growth has been too low. There are things that could have been done to change that, but changing the monetary policy framework isn’t one of them.

But beyond that it all got rather strange. He started his speech with the references to Caravaggio to play up the dark and turbulent nature of the last few years (as he sees them). How difficult it all is for small country central banks. More so, he suggests, than previously.

I guess Graeme Wheeler is a latecomer to central banking. He’s been Governor for only three years and spent most of his career doing stuff other than macroeconomic policy. So perhaps recency errors should be pardoned. But it isn’t clear why he thinks, or wants us to think, that his job is harder than that of his predecessors (Don Brash, the challenges of disinflation, or Alan Bollard, and the massive credit boom). Self-pity is rarely an attractive quality, and perhaps especially so when it comes from highly-paid powerful public officials. The Governor has been given a relatively straightforward job to do by Parliament, and – unlike many of his offshore peers – he still has all the conventional tools at his disposal. He has made some mistakes along the way, as his predecessors did (and his successors no doubt will too), but it just is not that hard to get it roughly right.

There are some analytical puzzles to be sure, but we (taxpayers) don’t pay Wheeler to answer all those. We pay him to keep medium-term trend inflation near 2 per cent. And he hasn’t done that job very well. Inflation has surprised on the weak side for several years. It has surprised both the Bank and the markets, but the Bank has the job of delivering inflation near target. Having fairly consistently failed to do so, a reasonable rule of thumb might have been something along the lines of “core inflation has been below the midpoint of the target for so long, and we don’t fully understand why, so we’ll hold fire, and not raise interest rates until (say) core inflation is actually back to around 2 per cent”. It isn’t a perfect rules – in an imperfect world there are no such rules – but it would be better than what we’ve had.

Part of Graeme Wheeler’s defensive strategy – which shouldn’t really be needed, because there should be no great shame in recognising a mistake and owning up to it – is to cloth himself in the problems of other countries. Many other advanced economies have also struggled with at best modest (per capita) economic recoveries, and surprisingly weak inflation. But most of those countries had little or no conventional monetary policy ammunition left. Interest rates were at zero. I don’t think Wheeler’s speech even mentions the point.

By contrast, New Zealand’s OCR at 2.75 per cent means the Governor (and his predecessor) had plenty of room, if he (they) had chosen to use it, to secure a rather more conventional recovery in New Zealand. As I’ve pointed out previously, in conventional New Zealand recoveries we see a couple of years of 4-5 per cent GDP growth. We’ve seen nothing like that since 2009, despite the very rapid population growth in the last year or two. The number of people unemployed has stayed high, and has recently been rising again. That isn’t because of the travails of the rest of the world, but because of the Governor’s misjudgements. Inflation wasn’t rising. He didn’t need to raise interest rates.

As he winds up his general observations, Wheeler includes a couple of other curious paragraphs. He claims that “economic management has come a long way since Paish described it in the 1960s as like driving a car with a brake and an accelerator and only being able to look through the back window.” He backs this claim, that things have come a long way, by reference to sophisticated models used by central banks today [and when is that expensive model, developed at taxpayers’ expense, finally going to be published?]. But then he changes course midstream, concluding that really the models can’t tell one much and are more use for posing questions than delivering answers. I entirely agree with that final observation, but then it is a puzzle as to why the Governor thinks that economic management has improved a lot since the 1960s. As the Governor found with his ill-fated tightening campaign last year, forecasting remains hard, especially about the future. And even the rear-view mirror is prone to mislead at times.

And then Wheeler winds up the whole speech with his paragraph about The Raft of the Medusa, the “forlorn and exhausted sailors” and the “wild seas” which are apparently “symptomatic of the world central bankers are trying to navigate”. It is all bizarrely self-pitying, especially for a Governor with instruments at his disposal. The steering wheel isn’t broken.  The hull isn’t holed.

Here is the Wikipedia summary of the story of the painting.

it is an over-life-size painting that depicts a moment from the aftermath of the wreck of the French naval frigate Méduse, which ran aground off the coast of today’s Mauritania on July 2, 1816. On July 5, 1816 at least 147 people were set adrift on a hurriedly constructed raft; all but 15 died in the 13 days before their rescue, and those who survived endured starvation and dehydration and practiced cannibalism. The event became an international scandal, in part because its cause was widely attributed to the incompetence of the French captain

Great painting, but of a terrible event, for which the captain had to take blame.  The French public knew that.

The mismanagement of New Zealand’s monetary policy in recent years springs to mind. Fortunately, no one dies from those sorts of mistakes, but thousands of people are unemployed today who would not have been if the Reserve Bank of New Zealand – and specifically its Governor – had not made repeated choices – and it was pure choice, unlike the situation in ZB countries – to hold interest rates persistently higher than they needed to be. The apparent indifference of New Zealand’s elites – and of the Governor and his Board – to the awfulness of the involuntary unemployment (“forlorn and exhausted”?) is something I still struggle to understand.